SBA Loan Requirements: Credit Scores
If you’re considering applying for an SBA loan , like the SBA 7(a) loan , having good credit is a must. However, not every SBA loan requires a borrower to the same credit score, or range of scores, to be eligible . In this article, we’ll pick apart the most popular kinds of SBA loans and the cred
If you’re considering applying for an SBA loan, like the SBA 7(a) loan, having good credit is a must. However, not every SBA loan requires a borrower to the same credit score, or range of scores, to be eligible. In this article, we’ll pick apart the most popular kinds of SBA loans and the credit scores and borrower will likely need to have to get approved.
SBA 7(a) Credit Score Requirements
SBA 7(a) loans, which are the most popular kind of SBA guaranteed financing on the market, typically require borrowers to have a minimum credit score of 640. However, since SBA 7(a) loans can be difficult to qualify for, most borrowers will likely find much greater success if they can boost their credit score into the 680+ range. Standard SBA 7(a) loans have a maximum loan amount of $5 million and can be used for both commercial real estate and working capital, making them one of the most flexible kinds of small business loans available.
SBA 7(a) Express Loans
SBA 7(a) Express Loans have pretty much the same credit requirements as Standard SBA 7(a) loans, which usually means a minimum credit score of 640, with an ideal credit score of 680+. Unlike Standard 7(a) loans, SBA 7(a) Express Loans have a loan limit of $350,000, but can be approved in a much shorter period of time, making them ideal for businesses that need a quick source of financing.
The SBA CAPlines program, which provides revolving lines of credit to small businesses who need it, generally requires a minimum credit score of 660, slightly higher than the minimum for SBA 7(a) loans. In most cases, CAPlines can be collateralized with unpaid client involves and other forms of short-term collateral.
SBA Export Loans
SBA Export Loans, which include SBA Export Working Capital Loans provided by the SBA Export Working Capital Program (EWCP), SBA Export Express Loans, and SBA International Trade Loans, also have a minimum credit score requirement of 660.
Unlike most other kinds of SBA loans, SBA Microloans have somewhat less stringent credit requirements, with a minimum credit score of between 620-640 typically required. Microloans can be issued in amounts up to $50,000, and, while the credit requirements might be less strict, collateral is still required.
SBA 504 Loans
SBA 504 loans, which are intended for the purchase and construction of owner-occupied commercial real estate (and can’t be used for working capital), often have significantly lower interest rates than SBA 7(a) loans. However, 504 loans have the strictest credit requirements of any SBA loan, with a minimum credit score requirement of 680.
What is the minimum credit score required for an SBA loan?
The minimum credit score required for an SBA loan depends on the type of loan. For SBA Microloans, the minimum credit score is typically between 620-640. For SBA 7(a) loans, the minimum credit score is typically 640, but borrowers may find greater success if they can boost their credit score into the 680+ range.
What other factors are considered when applying for an SBA loan?
When applying for an SBA loan, the lender will evaluate your creditworthiness based on a number of factors:
- You must be able to show that you can pay your business expenses, a draw for yourself and the loan payment the income generated by the business. The lender will ask to see sales records for prior years and cash flow projections.
- If you are operating a start-up, the lender will have questions about your prior business experience and education to determine that you have the know-how to successfully operate the type of business you wish to start.
- Business owners need to invest a significant amount of money in their own company before they can seek outside funding. For a startup, the lender will want to see a minimum of $1 of the owner’s money invested in the business for $3 of loan funding. For an established business, the lender is looking for a maximum of $4 of debt to $1 of net worth for the business.
- The lender will check your personal and business credit histories. You are more likely to be approved if your credit report shows that you have a history of meeting your credit obligations as agreed. If there are any blemishes on your credit reports, be prepared to explain them to the lender in detail.
- A good credit score - preferably above 680.
- A history free from recent bankruptcies, foreclosures, or tax liens.
- Having been in business for at least two years.
- The ability to provide collateral for loan requests over $25,000.
- The ability to make a down payment of 10% if your intended use of funds is to purchase a business, commercial real estate, or business-related equipment.
- Sufficient cash flow to meet your debt obligations.
- Sufficient working capital (once you subtract liabilities from assets).
- “Good character” according to the SBA (partially decided based on your track record of managing your resources and day-to-day business affairs).
What are the advantages of an SBA loan over other types of financing?
The SBA Express loan is a great option for business owners who have been denied commercial loans due to their perceived risk. The Small Business Administration (SBA) guarantee to third-party lenders ensures a higher approval rate, and the turnaround time after applying is much faster than other forms of financing. Additionally, SBA loans typically range from $500 to $5.5 million, and can be used for most business purposes, including operating capital and long-term fixed assets. There are also a variety of loan products under the SBA umbrella to choose from, so no matter what the need is, there is likely an SBA guaranteed product that will benefit your business.
What are the disadvantages of an SBA loan?
SBA loan disadvantages include:
- Lengthy approval times (for standard SBA 7(a) loans)
- Lots of documentation
- Collateral is often required
- Certain businesses, including real estate investing, lending, gambling, and speculation are prohibited
- High credit scores are typically required (typically 680+)
- May be restrictions on supplemental/additional financing
- They may be difficult to get if you don't have a strong credit history, though this is not a hard requirement.
- Significant paperwork is required by the SBA.
- They cannot be used for investment properties.
What are the different types of SBA loans available?
The Small Business Administration (SBA) guarantees many different types of loans to meet the unique needs of most small business owners. The most widely used loan is the SBA 7(a) loan, but there are other options available. The other types of SBA loans include: